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Idaho's Weekly Journal of Local & National Commentary Week
2815

byFree Market
Duck

Forget
Britain's David Cameron Veto, Another Eurozone Crisis is Only Weeks Away

by Jeremy Warner
The Telegraph

(Dec
13, 2011)

Leaders in the European Union will not
take the measures towards fiscal union that would save their ailing
economies.

Mario Draghi, president of
the European Central Bank, remains intransigent. ... What he has agreed to
do is provide unlimited
liquidity to banks, so
that they could in theory buy up sovereign bonds instead. But even if
this were to happen, it couldn’t provide a lasting solution. European banks
are already bust enough; to exaggerate the problem by loading themselves up
with junk sovereign debt is scarcely going to help. As for Germany, hell
will freeze over before it accepts joint liability for periphery debts.

There was no fiscal compact
of any significance agreed last weekend. Nor was there any progress
made in providing a credible backstop. Even with the extra funds which
European leaders are laughably promising via the IMF “back door” (as if they cannot trust
themselves with their own money),
the financial firewall remains dwarfed by the ever-growing size of the
problem. Italy’s funding needs would gobble up the entire bail-out money
within two years. In any case, the IMF back-door support is already in
trouble. There’s no clarity on where the extra 200 billion euros are going
to come from, with the Bundesbank refusing to cough up unless underwritten
by the German parliament and confusion over whether non-euro countries are
expected to contribute.

If you really want to
understand the bankrupt moral philosophy of altruistic collectivism behind
what is going on in the European Union today -- as well as in the United
States -- I could simply ask you to read Ayn Rand's Atlas Shrugged, or see
the movie. That way, you can also "see" what the obvious result will
be. The question, "Who is John Galt?" will soon be answered in Europe
and the US. -- FM Duck

London, England -- You wouldn’t believe it to listen to
the fulminating indignation directed at the UK from across the Channel, but
David Cameron did the eurozone’s political leaders a favour last weekend. By
refusing to sign up, he managed to create a convenient Aunt Sally for
Europeans to throw stones at, and divert attention from the summit’s failure
to come up with anything remotely credible to address either the single
currency’s existential crisis or the gathering economic slump. The latest in
a long line of self-styled “make or break” summits, it was in truth no more
momentous than any of the others.

What was agreed was some minor strengthening of the
Maastricht framework for governing monetary union, though some aspects of
the original “stability and growth pact” have actually been watered down.
The maximum fine that can be imposed for breach of the rules has been
reduced from 0.5 per cent of GDP annually to 0.2 per cent.

In most other respects too, the idea that some kind of
great leap forward in terms of fiscal and political union has occurred is a
nonsense. Consider what fiscal union of the type that exists within federal
states such as Germany and the United States actually means. First and
foremost, it requires centralised powers of tax collection and public
spending. These powers provide the main mechanism through which fiscal
transfers can be made to the more depressed regions of the sovereign state.

The amount of tax collected per head of population varies
between regions, but expenditure on schools, hospitals and other public
services remains uniform, or even weighted towards the poorer areas so as to
provide compensating inputs. Taxpayers in richer regions are made to
subsidise the poorer ones, in much the same way as high earners, by paying
disproportionately for public services, subsidise low earners. These
transfers are thought acceptable because nations are bound together by
shared history, language, culture and political institutions.

Monetary union cannot work effectively without such
transfers. The eurozone provides a textbook study in why this is so. A
common currency and interest rate allowed less competitive nations to borrow
from richer ones to finance unsustainable development, public spending and
lifestyles. The curtain has now fallen on the abundance of credit that
fuelled these booms. With no fiscal or monetary transfers to compensate,
peripheral nations are being forced into repeated rounds of self-defeating
austerity in order to survive and pay their debts. The default mechanism of
currency devaluation is also denied to them.

There was nothing in the measures agreed last weekend to
relieve these pressures and therefore no reason to believe we are any closer
to a resolution of Europe’s rolling series of debt crises. It is only a
matter of time – I’d give it no more than a week or two into the new year –
before the financial and accompanying economic contagion breaks out anew,
very likely in even more virulent form. The system has essentially broken
down, but it is as if eurozone policymakers are still fumbling around in the
boot for solutions, rather than looking under the bonnet.

Despite the evidence of its eyes, Germany wants to
believe that, provided everyone sticks to its teutonic standards, a monetary
union of fiscally sovereign nations is still possible. To Germany, the ideal
of European solidarity is all about everyone playing by German disciplines.
So in comes the balanced budget rule, in current conditions an economic
absurdity which, far from paving the way to fiscal union, hardwires
austerity into European law in a manner which seems only to condemn much of
the periphery to prolonged depression. There is virtually no chance any time
soon of these countries regaining competitiveness against an ever more
competitive Germany

The assumption had been that once Germany was persuaded
the correct disciplines were in place, it would ease off on its opposition
to debt mutualisation and/or more extensive central bank intervention. But
even if that’s what Angela Merkel, the Chancellor, would like to do, there
is very little sign of it happening in practice.

Mario Draghi, president of the European Central Bank,
remains intransigent. It is against his remit, he insists, to engage in
monetary financing. What he has agreed to do is provide unlimited liquidity
to banks, so that they could in theory buy up sovereign bonds instead. But
even if this were to happen, it couldn’t provide a lasting solution.
European banks are already bust enough; to exaggerate the problem by loading
themselves up with junk sovereign debt is scarcely going to help. As for
Germany, hell will freeze over before it accepts joint liability for
periphery debts.

There was no fiscal compact of any significance agreed
last weekend. Nor was there any progress made in providing a credible
backstop. Even with the extra funds which European leaders are laughably
promising via the IMF “back door” (as if they cannot trust themselves with
their own money), the financial firewall remains dwarfed by the ever-growing
size of the problem. Italy’s funding needs would gobble up the entire
bail-out money within two years. In any case, the IMF back-door support is
already in trouble. There’s no clarity on where the extra 200 billion euros
are going to come from, with the Bundesbank refusing to cough up unless
underwritten by the German parliament and confusion over whether non-euro
countries are expected to contribute.

To survive, the eurozone needs urgently to find some way
of internally sharing the burden of its debts. Two years after the crisis
began, progress remains as elusive as ever. – FM Duck